Recovering VAT on business motoring expenses and mileage allowances

Sole traders and partnerships are now able to claim ‘simplified’ income tax deductions for motor expenses. Whilst this is now starting to become common practise, the use of mileage allowances can result in VAT registered businesses losing out when recovering VAT, if the necessary records are not maintained for VAT purposes.

Maximising VAT recovery 

For many years, businesses have been able to pay employees and directors tax-free mileage allowances for using their own cars for business travel. Since April 2013, self-employed sole traders and partnerships have been able to make similar claims. The mileage rates are currently set at 45p per mile for the first 10,000 business miles each year and 25p per business mile thereafter. 

In order to claim income tax relief for these mileage allowances, HM Revenue & Customs require records to be kept of the business miles and the locations visited. 

For income tax relief purposes, petrol/diesel receipts, repairs and servicing invoices and other motor expense invoices do not need to be kept. Whilst this may appear to be attractive from an admin point of view, it has the significant downside of potentially preventing reclaims of the VAT included in the ongoing expenses if there are no receipts available. 

So, if your business wants to recover the VAT (which can soon mount up to a significant figure), it is essential that the records of motoring expenses (fuel receipts, repairs & servicing etc.) are kept by the business. 

What VAT can be recovered?

Sole Trader and Partnership Businesses:

        VAT can be reclaimed on the cost of fuel for business. 

       100% of VAT can be reclaimed on vehicle repairs, servicing etc.

Limited Companies: 

The VAT position is a little more complex for companies who do not provide fully expensed company cars, as the motor expenses are usually paid for by the directors or employees who own the cars.

The Company can claim VAT on part of the mileage allowances (using advisory fuel rates) that aim to reflect fuel costs and the business proportion of expenses such as servicing and repairs.

Our recommendation

Even though the tax authorities say that receipts need not be kept for the purposes of obtaining income tax relief in respect of mileage allowances, this ‘advice’ should be ignored if successful and valuable VAT recoveries are to be achieved.